Bank of England carries out 14th consecutive rate hike

Our head of investment reports on the UK central bank's decision today and its impact on forecasts.

DECISION

The Bank of England has raised interest rates again for the 14th consecutive time by 25 basis points to 5.25% as expected. Looking ahead, traders are expecting a 68% chance of another 25-basis point increase at its September meeting with a 32% chance of no change.

• Learn more: Low Cost Investment Platform | Interactive investor Offers | General Investing with ii

Some economists were anticipating a more aggressive 50 basis point move to 5.5%, but clearly the central bank has opted for a more incremental, data-dependent approach, particularly given that interest rates work with a shorter lag later in the rate-hiking cycle, where we are now.

VOTE SPLIT

The Monetary Policy Committee decision was by no means unanimous with a vote split of 6-3 in favour of this increase. Two members voted for a more aggressive 50 basis point move, while one dove wanted to keep rates on hold.

• Investors expecting to make returns comfortably ahead of inflation in 2023
• Cash or shares? What the data tells us about where to invest

Monetary policy is a notoriously blunt tool and is therefore less successful at tinkering around the edges. The magnitude of today’s hike is more about sending a signal about how concerned the central bank is about inflation. Clearly there’s a long way to go to bring inflation back down to the 2% target, but recent data points to encouraging signs that we’re finally moving in the right direction with global supply chain bottlenecks fading, wholesale energy prices on the decline, and increased slack in the labour market. Uncertainty remains around the outlook for food inflation and strong wage growth, both of which could slow the path for disinflation.

FORECASTS

The Bank of England has lowered its forecast for inflation in one year’s time to 2.82%, versus its prior forecast from May of 3.38%. It has also raised its full-year growth forecast to +0.5% in 2023 up from +0.25% in May but lowered its 2024 outlook for GDP from 0.75% in May to 0.5%. The central bank estimates unemployment will hit 4% in the fourth quarter up from its prior estimate of 3.75%.

• UK household costs rocket to highest in 30 years
• The UK's coming mortgage crunch

This is an upbeat assessment for the path for growth and inflation from the Bank of England. For GDP this marks a massive turnaround from its predictions last November when the central bank believed we were heading for the longest recession in a century. It clearly judges that the macroeconomic indicators are heading in the right direction but governor Andrew Bailey said we need to be ‘absolutely sure’ inflation falls ‘all the way back to 2%’, which is why another hike in September is possibly on the cards.